TOKYO, Sept 10 (Reuters) - Japan's Nikkei share average fell on Thursday as a surprise drop in machinery data heightened concerns about the economy, further spooking investors who rushed to book profits a day after the market posted its biggest one-day gain in nearly seven years.

The Nikkei dropped 2.7 percent to 18,267.44 in mid-morning trade after hitting as low as 17,956.15, just one percent above the seven-month low reached on Tuesday.

The index had jumped 7.7 percent on Wednesday as investors took advantage of the drop in the previous session which wiped off year-to-date gains.

"The market still expects companies to post double-digit gains, but the momentum of the Japanese economy is worse than initially expected," said Kazuhiro Miyake, chief strategist at Daiwa Securities.

Japanese machinery orders unexpectedly fell for a second straight month in July, fuelling concerns that weak business investment could undermine a recovery from an economic contraction in the second quarter.

China's slowing economy has also weighed on Japanese stocks, while investors remain on edge over when the U.S. Federal Reserve will raise interest rates. A drop in Wall Street overnight also put pressure on the market.

Chihiro Ohta, general manager at investment research and investor services at SMBC Nikko Securities, however, said he believed the sell-off in Japanese stocks was overdone, as the Nikkei traded below 10 percent of its 25-day moving average on Tuesday. A gap of 5 percent indicates the market is oversold.

For the first time in seven days, the short-sell ratio dropped below 40, according to data released by Japan Exchange Group after the market close on Wednesday. Short-sellers, who had expected the market to fall further, were eager to buy back when the Nikkei fell to near 17,500, traders said.

U.S. shares weakened after Apple Inc declined in heavy trade after launching new products, with analysts saying that expectations were so high ahead of the event.